Do your company owner clients have questions regarding the Employee Retention Credit (ERC)? If so, you're aware that the solutions aren't always easy to come by. Below, we'll go through the fundamentals of the ERC (Employee Retention Credit). And provide some information on best practices & common mistakes to avoid.
What Exactly Is The Employee Retention Credit?
The ERC is a refundable payroll tax credit that provides financial relief to businesses affected by the epidemic, encouraging them to retain their staff on the payroll. It was formed in the CARES Act of 2020 and has been updated by later legislation.
The Employee Retention Credit (ERC) is a tax credit that was implemented last year as a temporary coronavirus relief measure to help firms maintain staff on the payroll. Since then, the ERC has dramatically increased.
How To Account For Employee Retention Credit Correctly
If your company qualifies for the employee retention credit, you must understand which accounting standard applies to the account. Most experts advise utilizing "Accounting Standards Update Subtopic 958-605" for documenting this revenue. Because most enterprises only qualify if they fulfill the qualifying standards. Further, the government views the ERC as a conditional grant.
Adding Credits And Debits
Gross contributions and costs for the ERC should be documented. Prior to receiving the employee retention credit, your company's tax liability will be incurred for the total amount.
Employee retention credits should be recorded as a credit to grant revenue and a debit to accounts receivable. If the credit was received in advance payments, the refundable advance responsibility is credited, and the cash is deducted.
Common ERC Errors And Misconceptions
Regarding employee retention credit, most employers have a few basic misconceptions. Many businesses, for example, assumed they were ineligible for this credit because they had already claimed cash from the Paycheck Protection Program (PPP).
Fortunately, the CAA (Consolidated Appropriations Act) allowed qualifying enterprises to claim both. The statute removed the constraints that specified you could only claim one over the other.
My Business Did Not Shut Down
Another prevalent misunderstanding was that you couldn't claim the credit if your firm didn't entirely close down. Businesses forced to close, even partially, due to a government order may be eligible for the credit. For example, if your company has to cut its hours owing to a government mandate, it may still qualify for the credit.
Because My Business Was Essential, I Did Not Qualify
Even if you were judged vital, you might still qualify if there was a change or damage to your firm. For instance, if you were open but your suppliers or vendors were closed, you could still be eligible. If a section of your firm was declared non-essential and was harmed by government order, you may be eligible for the credit.
Employee Retention Credit Help
Accounting for employee retention credit can be tricky, especially if you don't know what guidelines to follow. There are also several typical pitfalls your company should avoid when accounting for this credit or claiming it retrospectively. Whether you need help accounting for this credit or just have general questions about ERC eligibility 2021
, ERC specialists are there to help you.